Not only have the number of 2013 filings of FDIC’s lawsuits against the former directors and officers of failed banks already exceeded any prior year’s filings, but the pace of filings in the second and third quarter this year exceed the filing rate in an any equivalent period during the prior three years, according to a new report from Cornerstone Research. The September 2013 report, which is entitled “Characteristics of FDIC Lawsuits against Directors and Officers of Failed Financial Institutions,” can be found here. Cornerstone Research’s September 16, 2013 press release about the report can be found here.


As a preliminary matter, it is worth noting that the report’s litigation filing figures are as of August 8, 2013, and its information about the number of failed banks is as of August 27, 2013. As reflected on the FDIC”s website, there have been additional lawsuit filings since August 8 (as noted here) and there have been additional bank failures since August 28 (as noted here). Where possible below, I have added parenthetical information to update the figures from the Cornerstone Research’s report to reflect these subsequent lawsuits and bank failures.


According to the Cornerstone Research report, during 2013, the FDIC’s pace of new lawsuit filings against directors and officers of failed banks has been elevated as compared to prior periods. As of August 8, there had been a total of 32 FDIC lawsuits filed against former directors and officers of failed banks during 2013. (As of September 13, 2013, the figure is up to 35). Those YTD figures already exceed the year-end failed bank lawsuit filing figures for 2012 (when there were 25) and 2011 (when there were 16). The filings during the second and third quarters of 2013 exceeded the filings during any equivalent prior period. If the filings continue their year to date pace, by year end there could be as many as 53 failed bank lawsuits during 2013. As of September 13, 2013, there have been a total of 79 lawsuits filed during the current bank failure wave.


Because the FDIC typically files its failed bank actions toward the end of the three-year statute of limitation period, and because the end of 2009 and the beginning of 2010 represented the high water mark period for bank failures, it is not entirely a surprise that the filings levels have picked up in recent periods. Of the 32 lawsuits filed this year through August 8, 2013, nine were against institutions that had failed in 2009 and the remaining 23 were involved institutions that failed in 2010.  


While failed bank lawsuit filings have been up during 2013, the number of new bank closures is down since the peak number of closures in 2010 (when there were 157 failed banks). According to the report, as of August 27, 2013, there had been 20 bank failures this year. (There have been two more bank failures since August 27, bringing the updated year to date total to 22.) The report projects that by year end 2013, there may have been as many as 31 failed banks this year. The report notes that between January 1, 2007 and August 27, 2013, there were a total of 488 failed banks. (With the two additional bank closures since August 27, the total is now up to 490).


About 15 percent of the banks that have failed have been the subject of an FDIC lawsuit. However, the figures are higher for the bank failures during 2009 and for 2010, as the bank failures from those years are now past or approaching the third anniversary of their closure date. With respect to the 2009 bank failures, 35 institutions, or about 25 percent of the failures that year, have already been the subject of an FDIC lawsuit. In addition, the directors and officers of a number of other banks that failed during 2009 reached settlements with the FDIC without a lawsuit being filed. Taking into account both the bank failures that resulted in lawsuits and the bank failures were there were settlements without lawsuits, at least 41 percent of the 2009 failed institutions have been the target of FDIC claims.


For the 2010 bank failures, about 30 institutions, or about 19 percent, have already been the subject of an FDIC lawsuit. Another nine banks that failed in 2010 have settled with the FDIC without a lawsuit being filed, meaning that a total of at least 25 percent of the 2010 failed banks has been the target of an FDIC claim.


The lawsuits generally have targeted the larger failed institutions and those with a higher estimated cost of failure. Of the 75 lawsuits filed through August 8, 58 involved institutions that had total assets greater than $217 million, which is the median asset size of failed institutions since January 2007. The failed bank lawsuits so far in 2013 have generally targeted even larger institutions; the median total assets figure for the failed banks targeted in the first quarter was $644 million and the second quarter was $1.1 billion.


The 75 failed banks that were the target of lawsuits up to August 8 had a median estimated cost to the FDIC of $158 million. In the 69 of the complaints in which the FDIC stated a damages amount, the FDIC has claimed a total of $3.6 billion in damages, with the average damages claim of about $53 million and the median damages claim of $27 million.


The greatest number of the FDIC’s failed bank lawsuits has been filed against failed Georgia banks, which is hardly surprising given that Georgia had the largest number of failed banks. So far (as of August 8), Georgia has had 17 lawsuits, Illinois and California have had ten and Florida has had nine. Of the 76 lawsuits through August 8, 46 (or about 60.5%) are from just those four states.


The report includes a detailed summary (on page 10 of the report) of the ten FDIC failed bank lawsuits that have settled, including in most cases the settlement amounts, and in several of the cases, the amount that D&O insurance contributed toward the settlement